Today’s challenge will be a crash course on investing. Since there is a lot to go through and not much blog post length to use, let’s dive straight into this…
Any company is made up of shares and each share is essentially a very small part of a company. If you have a share, it means you own a part of that very business. The more shares you have, the bigger the part you own of that company.
When a company decides to issue and sell shares, they effectively raise money for the company in order to reinvest, start up a new department or launch a new product. The main advantage of selling shares over taking out a loan is that they never need to repay the money they raised, nor is there any interest to be paid back over the money.
Investors are interested in buying shares because of two main reasons: firstly it gives dividend payments (part of the company’s yearly profit divided amongst share holders) and secondly investors hope that with time these shares will go up in value and can be sold with a profit.
A bond is in essence nothing more than an IOU that a government or company issues when they borrow money from investors. Like with shares, companies and governments often issue bonds in order to raise capital they need for a new investment or expansion. Unlike most other loans however, bonds are not paid back through monthly payments, but all in one go at the end of their life span.
Bonds offer two advantages to companies that a loan from a bank often doesn’t: the interest rates can be lower than those a bank charges and it gives them more flexibility and freedom when it comes to choosing between reinvesting and loan repayments with any profits made, whereas loans from banks are often tied to strict repayment conditions.
Bonds offer similar advantages as shares to investors: monthly interest payments as well as the possibility of capital gains if bonds are resold at a profit.
For today’s challenge and it preparation for the challenges coming up in the next few days, find out more about how shares and bonds behave on the stock market by typing “shares / bonds + (a company)” to see how the prices of these assets can fluctuate over time, not just over several weeks but even years.
Once you’ve done that and have a better feeling of shares and bonds, let us know in the Facebook Group or via any other social medium that you have completed this challenge and have entered the realm of investors. If you’re eager for more, there’s a lot of extra information you can consult in some of the 100 steps to Financial Independence, including in Step 47: Understanding Shares, Step 48: Understanding Bonds, Step 49: The difference between Shares and Bonds.